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NAM: Monday Economic Report

The manufacturing sector added 16,000 net new workers in July, extending the gain of 12,000 workers in June and reflecting growth in seven of the past eight months. Over that eight-month span (since November), manufacturers have averaged 12,500 new jobs per month—definite improvement from the loss of 16,000 workers on net in 2016. In July, there were 12,425,000 manufacturing workers. At the same time, average weekly earnings for manufacturing workers have risen 2.8 percent over the past 12 months. At the same time, the U.S. economy increased nonfarm payroll employment by 209,000 in July, exceeding 200,000 for the third time in the past four months. The unemployment rate fell from 4.4 percent in June to 4.3 percent in July, returning to the pace in May, which was a 10-year low. Such strong labor market growth should further cement the Federal Reserve’s normalization plans, including raising short-term rates and reducing the size of its balance sheet, perhaps doing both at its upcoming meeting in September.

The good news is that the outlook for business remained encouraging. The Institute for Supply Management (ISM) reported that manufacturing activity continued to expand strongly in July, even as it pulled back from nearly a three-year high in June. The ISM Manufacturing Purchasing Managers’ Indexdecreased from 57.8 in June—its strongest reading since August 2014—to 56.3 in July. Despite some easing in many of the key measures in this survey, the underlying data reflect healthy expansions in demand and output, with manufacturers mostly upbeat in their outlook. In a similar way, the Dallas Federal Reserve Bank reported that manufacturing activity remained strong in July. Many of the key measures strengthened in July, including new orders, production and hiring, among others, and more importantly, manufacturing leaders in Texas remained very upbeat about the next six months. Likewise, other regional surveys also have reported expanding levels of activity in July.

Meanwhile, other measures on the health of the manufacturing sector were mixed. On the positive side, the U.S. trade deficit narrowed to its lowest level since October, and U.S.-manufactured goods exports have continued to trend in the right direction through the first half of this year. Using non-seasonally adjusted data, U.S.-manufactured goods exports have risen 3.86 percent year to date relative to the same time frame last year. This is welcome news after weaknesses across the past two years. In addition, new factory orders rose 3.0 percent in June to its highest level since October 2014. Yet, the bulk of that increase stemmed from a jump in nondefense aircraft and parts orders, likely centering around the International Paris Air Show. As a result, durable goods orders leapt 6.4 percent for the month but edged up just 0.1 percent with transportation equipment excluded. With that said, new manufactured goods orders have soared over the past 12 months, up 9.8 percent since June 2016. Excluding transportation, the gains were a still healthy 6.9 percent year-over-year.

In contrast to those figures, private manufacturing construction spending continued to be weak, slipping further in June. The value of construction put in place in the sector declined 1.9 percent in June to $67.70 billion, its lowest level since September 2014. To further illustrate the recent deceleration in activity, construction spending in the sector averaged $69.92 billion in the first half of 2017, down from the average of $75.97 billion in the same time frame in 2016. While manufacturing construction has trended mostly higher over the past few years, activity has moved lower since achieving the all-time high of $82.13 billion in May 2015. Nonetheless, we would continue to expect a turnaround in construction activity in the coming months, especially considering the improved outlook of late. Overall, private nonresidential construction spending edged up 0.1 percent in June, with 1.1 percent growth year-over-year.

Meanwhile, personal spending inched up 0.1 percent in June, slowing from 0.2 percent growth in May. Personal consumption expenditures (PCEs) declined for both durable and nondurable goods, but service-sector spending increased. We have seen spending pull back from more robust growth at the end of last year. Even with some easing, however, consumer purchases continue to expand at a decent clip, with personal spending up 3.8 percent year-over-year. This can be also seen in the saving rate data, which dropped to 3.8 percent in June. One year ago, the saving rate was 5.1 percent. This is a sign that Americans have accelerated their purchases in general over the past 12 months. In other news from that same report, personal incomes were flat in June, off from a 0.3 percent gain in May. Over the past 12 months, personal incomes have risen by a modest 2.6 percent in June, down from 3.4 percent in February and March.

This week, we will get new data on consumer and producer prices. I would expect to see a similar trend to what we observed in the PCE deflator, which was unchanged in June. After seeing pricing pressures accelerate strongly earlier this year—with the PCE deflator peaking at 2.2 percent year-over-year in February—inflation has pulled back since then. Since June 2016, the PCE deflator has increased 1.4 percent, its lowest year-over-year rate since November. Similarly, excluding food and energy, core inflation increased 0.1 percent in June, or 1.5 percent year-over-year. Other highlights this week include the latest figures for consumer credit, job openings, labor productivity and small business optimism.